A 10% drop may be looming, but ‘misery’ index signals otherwise

By Shawn Langlois

After what has felt like an interminable slog, there seems to be a relative Sharknado forming over this market. That’s right — high winds, flying sharks and finally some trading action.

The ECB got it started yesterday, and the jobs report looks to be kicking it up a notch this morning.

Our call of the day suggests that this rally is about to end in with a nasty boom. We’ll be lucky to escape with a 10% drop in the next few weeks. Why? Because the insanely overbought Dow Jones Transportation index tell us so. And that indicator (see below) has been perfect for more than a century.

Just to even it out, Ed Yardeni will see your Transports red flag and raise you a green light from the “misery” index, which is the sum of the unemployment rate and the inflation rate. As you can see by the chart, it usually peaks at the start of a bull market and craters at the start of bear markets. Japan hasn’t been this miserable since 1981, but we’re fat and happy here in the States. Mostly fat. But happy, too.

Yardeni says we’re going to stay that way, as far as this rally is concerned.

“That cycle is mostly attributable to the similar cycle in the unemployment rate,” he wrote. “The unemployment rate was 6.3% during April. I expect that it will fall to 5.5% by mid-2015. That should keep the bull running for another year at least.”

The quote of the day: “Those who benefit from this crony-capitalist state go to extreme lengths to paper over the reality and convince Americans that the system works, the American Dream is still a reality and that American democracy is in fact democratic.” — Y. Falkson, on the Of Two Minds blog.

The economy: Jobs data came in almost bang on expectations, with May nonfarm payrolls up 217,000 versus expectations of 210,000 and the employment rate held steady at 6.3%. Clearly the prior-day ECB easing extravaganza was better.

The chart of the day:Greg Harmon of Dragonfly Capital isn’t quite ready to fire up a Facebook
/quotes/zigman/9962609/delayed/quotes/nls/fbFB account of his own — like teens these days, he’s probably more of an Instagram type — but his finger is on the trigger in terms of buying the stock. The bullish cup-and-handle setup shown here points to a potential revisiting of the $72 level from earlier this year. “The far right of that Cup shows a building of higher lows and a the current consolidation near the trigger at 64.25,” he said. “A move over that and a trip back to the March highs is in the cards.”

The call of the day: The guys over at the ReadTheTicker.com blog say this indicator is a slam-dunk, “100% successful” warning sign of an upcoming market drop. Basically, whenever the Dow Jones Transports
/quotes/zigman/627450/realtimeDJT touches the top of the channel, boom, a blow-off happens shortly thereafter.

“It is safe to say that within the next 12 weeks, a 10% price adjustment is very, very likely,” they said, adding it may be much worse considering the “screaming massive P/Es” for the Russell
/quotes/zigman/2759624/realtimeRUT and the Nasdaq
/quotes/zigman/12633936/realtimeCOMP. “Traders are the same in 2014 or 1900, they have GREEN on the screen and soon they will turn this GREEN into CASH. Profit-taking on huge winners is an easy market call.”

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Need to Know (NTK) guides investors to the most important, insightful items required to chart a course ahead of each trading day. Anchored by lead writer Shawn Langlois, NTK will sift through the fire hose of news, commentary and data, from traditional and non-traditional sources, and extract what’s most essential. You can start reading NTK here as it begins publishing at approximately 6:30 a.m. ET, or sign up here to get a version in your email box every morning at approximately 8:45. a.m. ET.